Inshore Investments Ltd. v. The Queen, 92 DTC 6162, [1992] 1 CTC 189 (FCTD)

Dubé, J.:—In a nutshell, the issue in this matter is whether the sum of $250,000 paid to the plaintiff was” on account of special management services" provided by it, as assumed by the defendant, or part of the proceeds of disposition of its shares as claimed by the plaintiff.

The key transaction is a memorandum of agreement dated March 17,1978, wherein Blake Investments Ltd. (” Blake"), a predecessor of the plaintiff, sold its 25,000 class A shares in Taiga Wood Products Ltd. ("Taiga") back to Taiga through an intermediary company, 800 E. 7th Ave. Group Ltd. The most relevant paragraphs of the agreement are as follows:

2.1 Subject to the terms and conditions hereinafter set forth, the Vendors covenant and agree on the Closing Date to sell, assign and transfer to the Purchaser and the Purchaser covenants and agrees to purchase from the Vendors the Shares and the Debenture and all other rights including accrued interest on the Debenture which the Vendors, or any of them, now or at any time prior to the completion of the sale herein provided, may have against the Company, for a purchase price (the"Purchase Price”) of:

a) for the Shares—$1,000,000; and

b) $81,932.90 for the Debenture and all other rights;

2.2 The Purchase Price shall be payable as follows:

a) $100,000 on the execution and delivery of this Agreement by way of a deposit to be held in trust by the Vendors' solicitors, Owen, Bird, and paid to the Vendors on the Closing Date unless the sale herein is not completed by reason of any default of the Vendors under any of their obligations herein contained in which event it will be returned to the purchaser; and

b) the balance of the Purchase Price on the Closing Date; in cash or by negotiable certified cheque drawn on a chartered Bank of Canada;

3.3 The entering into of this Agreement and the transactions contemplated hereby will not result in the violation of any of the terms and provisions of any indenture or other agreement, written or oral, to which any of the Vendors may be a party or whereunder any of them is constituted;

3.4 This Agreement has been duly executed and delivered by the Vendors and is a valid and binding obligation of the Vendors enforceable in accordance with its terms;

4.3 The Vendors shall deliver to the Purchaser at the Time of Closing:

a) a favourable opinion of the Vendors’ counsel, in form satisfactory to counsel for the Purchaser, that:

c) a copy of a special resolution of Blake certified correct by the secretary thereof approving the sale of the Shares and the Debenture and other rights hereunder;

8.2 Each of the Vendors and Jones shall have complied with all covenants and agreements herein agreed to be performed or caused to be performed by them;

9.2 At the Time of Closing, upon fulfillment of all of the conditions set out in Article 8 which have not been waived in writing by the Purchaser:

b) the Vendors shall cause the "A" Directors to sign a resolution of the Directors of the Company approving the transfer of the Shares and the Debenture from Blake to the Purchaser or its nominee or nominees;

c) the Vendors shall deliver or shall cause to be delivered to the Purchaser:

(i) the resignations dated as of the Closing Date of the "A" Directors as directors and officers of the Company;

d) Taiga shall pay by negotiable certified cheque to the Vendors the sum of $250,000 on account of special management services which the Company acknowledges have been performed by the Vendors for the Company and which has already been authorized;

14.1 This Agreement, including the Schedules hereof, constitutes the entire agreement between the parties. There are not and shall not be any verbal statements, representations, warranties, undertakings or agreements between the parties and this Agreement may not be amended or modified in any respect except by written instrument signed by the parties.

[Emphasis added.]

The agreement was duly signed by all the parties involved after due consultation with their respective accountants and legal advisors. All the consequential steps referred to in the agreement were subsequently carried out by the parties involved. The following certified cheques were issued by Taiga to the order of Blake in accordance with paragraphs 2.1 and 2.2 of the agreement: $81,932.90 for the Debenture, $100,000 on the execution of the agreement and $900,000, the balance of the purchase price on the closing date. A fourth cheque in the amount of $250,000 was also issued in accordance with paragraph 9.2(d) aforementioned. The four cheques were cashed by Blake.

In accordance with paragraph 4.3 all necessary actions and proceedings, corporate or other, were taken to authorize the vendors to enter into the agreement. It is to be noted that Blake's solicitor objected to the first two drafts of the agreement mostly on account of possible conflicts with the British Columbia Company Act R.S.B.C. 1979, c. 59 but was agreeable to the final version of the agreement. I shall return to that later.

Pursuant to paragraph 4.3(c), Blake provided a copy of a special resolution approving the sale of the shares and the debenture. Each of the vendors, including Richard Jones, complied with all covenants and agreements agreed to be performed as provided under paragraph 8.2. The evidence also shows that the parties fulfilled all the conditions referred to in paragraph 9.2, including the resolutions, the resignations, the endorsement of share certificates, the release of the guarantees, and more importantly, as mentioned earlier, Taiga paid by negotiable certified cheque to Blake the amount of $250,000 stipulated in the crucial paragraph 9.2(d).

Finally, the agreement was neither amended nor modified in any respect by any written instrument signed by the parties, as provided under paragraph 14.1.

The plaintiff contends that it is the substance and reality of the transaction that should be considered, rather than the form in which it was expressed (The Horse Co-operative Marketing Association v. M.N.R., [1956] C.T.C. 115, 56 D.T.C. 1064). He refers to Viscount Simon's statement that the name given to a transaction does not necessarily decide the nature of the transaction and the question always is the real character of the payment (C./.R. v. Wesleyan, [1948] 1 All E.R. 555, 30 T.C. H (H.L.) at pages 24-25). He submits that, on the evidence, it should be found that the sum of $250,000 although described as being payable “on account of special management services" performed by the vendor was in substance additional consideration for the purchase of the share. He claims that there is no evidence of such management services rendered which would justify the payment of a fee of $250,000.

However, the agreement is clear and unambiguous on its face. The several signatories are competent and experienced businessmen. The main spokesman and most interested person on behalf of the plaintiff, Richard Jones, applied his signature on the agreement three times: once as vice-president of Blake, once on his own behalf as a vendor, and again as a party of the third part.

Mr. Jones appeared as the key witness for the plaintiff. Another witness for the plaintiff, John Mohammed, also signed as one of the partners, collectively called“ the Vendors". The other two partners signing as vendors were Walter A. Dawson and Donald J. Gordon, two Fort Nelson businessmen who did not appear as witnesses.

Obviously, the plaintiff has a very heavy onus to overcome. Why would all these highly responsible businessmen willingly sign a document which does not reflect the true nature of the transaction?

It is trite law that where there are several ways of completing a transaction a taxpayer is free to choose the one that will minimize his tax burden. Clearly, that is the one selected in this instance by Taiga, the purchaser. All the vendors, after extensive bargaining, endorsed the agreement. The vendors now seek to repudiate their endorsements so as to obtain a more favourable assessment for the taxation year in question. As my former colleague Walsh, J. said in Lakeview Garden Corporation v. M.N.R., [1973] C.T.C. 586, 73 D.T.C. 5437 (F.C.T.D.), at paages 591 (D.T.C. 5440): "However, as has frequently been pointed out it is not what the taxpayer might have done to minimize taxation that determines the issue but the taxpayer must abide by the position which it has taken.”

In a very recent decision of the Federal Court of Appeal, Canada v. Albert D. Friedberg, [1992] 1 C.T.C. 1, 92 D.T.C. 6031, the first issue to be resolved was whether two collections given to the Royal Ontario Museum were "gifts" so as to qualify as deductions under paragraph 110(1)(b.1) of the Income Tax Act. This paragraph of the reasons of Linden, J.A. (at pages 2-3 (D.T.C. 6032)) bears reproduction.

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see Canada v. Irving Oil Ltd., [1991] 1 C.T.C. 350, 91 D.T.C. 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seekto restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.

[Emphasis added.]

As Linden, J.A. said, evidence of subjective intention to correct unambiguous documents is "rarely determinative".

As mentioned earlier, in the case at bar, evidence was heard. Two of the signatories, Messrs. Jones and Mohammed, and a Vancouver solicitor, William

E. Ireland, testified on behalf of the plaintiff. The National Revenue auditor, Mr. I.A. Evelyn, and Patrick E. Hamill, the president and signatory for Taiga gave evidence for the defendant. The evidence as a whole is somewhat complex as Messrs. Jones and Hamill both described in detail the many transactions involving Blake and the subsequent formation of Taiga going back to the early 1970s. However, for purposes of clarity and brevity, the most relevant facts may be reduced as follows.

In the early 70s, Mr. Jones, a former bank manager who had become a financial consultant, joined with Patrick Ballantine, a venture capital investor. In March 1971 Blake Investments Ltd. was incorporated under the British Columbia Company Act. All issued shares were owned by Mr. Ballantine. At that time a limited partnership known as Blake Investments & Company was also formed: its members were Patrick Ballantine 85 per cent, Blake Investments Ltd. 5 per cent and, at a later date, Richard Jones 10 per cent. In 1973 the partnership of Blake Investments & Company purchased 60 per cent of the shares of Taiga for a total consideration of $25,000.

In January 1978, Mr. Ballantine moved to Toronto and Mr. Jones made an offer to purchase all of Mr. Ballantine's interests in the partnership and all of the shares owned by Mr. Ballantine in Blake for a total purchase price of $325,000. In order to finance the purchase, Mr. Jones formed a partnership with John Mohammed ('/3 interest), Donald Gordon C/6 interest), Walter Dawson C/6 interest) and himself C/3 interest).

These facts are obtained, not only from the evidence of Mr. Jones, but also from a letter addressed to him on March 15, 1979, by his own solicitor (of the firm Thorsteinsson, Mitchell, Little, O'Keefe & Davidson) in connection with Mr. Jones’ tax position in his company. The letter goes on to say that on March 17, 1978, Blake sold the shares owned by it in Taiga for $1,000,000 to a company known as 800 E. 7th Ave. Group Ltd., acting as a nominee for Taiga. In addition to the $1,000,000 received by Blake for the sale of the shares in Taiga, "the company also received $250,000 from Taiga in connection with management services to be rendered".

In 1978 Blake changed its name to Inshore Investments Ltd., the plaintiff in this action. In the course of its operations before the departure of Mr. Ballantine in 1978, Blake had invested venture capital in several small companies in which it became a shareholder: Creekhouse Industries Ltd., Millar Building Syndicate, False Creek Marinas Ltd., Pac-Com Holdings Ltd., Mantle Industries Ltd. and, of course, Taiga Wood Products Ltd.

The shares in Taiga are the shares that the Jones group (as owners of Blake) wanted to sell back to Taiga. Negotiations began between the vendors and the purchasers, the two main actors being Mr. Jones and Mr. Tamill. Both men proved to be self-confident, astute, and articulate witnesses. Taiga, formed in 1973, was to be a wholesale lumber company purchasing from B.C. sawmills and selling throughout Canada and the United States mostly by rail cars. The original agreement was that Blake would buy the 25,000 class A shares at $1 per share and $325,000 in debentures payable in ten years but redeemable by Taiga after five years.

Mr. Jones is adamant that no discussion of management fees and no agreement as to the payment of management fees took place at that time or at any other time until the resale of the shares back to Taiga in 1978. Both parties obtained expert valuations of the shares. On January 17, 1978, Mr. Jones sent a circular letter to all Taiga shareholders offering them two alternatives for the sale of the 25,000 class A shares: either $1,250,000 payable cash before February 28, 1978, or the price of $1,500,000 payable over three years.

On March 1, 1978, Mr. Hamill met with Messrs. Dawson and Gordon at Fort Nelson and signed a draft handwritten agreement for a total pay-out of $1,225,000, including a “bonus” to Blake of "$225,000-$250,000". Mr. Jones claims that his two partners at Fort Nelson were not authorized to sign the agreement. However, Mr. Jones’ evidence at discovery indicates that Messrs. Dawson and Gordon phoned Messrs. Jones and Mohammed that Mr. Hamill was coming up to Fort Nelson to make an offer and Mr. Mohammed would have replied: “Well, get what you can in writing from them.”

Asked by the Court why he signed the March 17, 1978 agreement if he felt that the sum of $250,000 was part and parcel of the purchase price of the shares and not for special management services as provided under subsection 9.2(d) of the agreement, Mr. Jones answered that time was of the essence because Taiga was about to redeem the debentures thus diluting the position of his group. As far as he was concerned, the amount of $1,250,000 was the right amount for the re-purchase of the shares, whatever description was put on it: there had been no management fees involved.

In his evidence, Mr. Mohammed acknowledged that he received a fax of the Fort Nelson handwritten agreement signed by Mr. Dawson but said that he informed Mr. Dawson that he rejected the offer. The witness met with Mr. Hamill who mentioned a $250,000" bonus” (not management fees). He thought that this description was for Mr. Hamill’s own purposes. Thereafter, Mr. Mohammed informed Mr. Jones of the $250,000 bonus and the latter said: "Let's go". Mr. Hamill's lawyer then prepared the March 17, 1978 agreement.

Mr. Ireland, of the Vancouver firm Owen, Bird, who had been Mr. Ballantine's solicitor since 1970, signed the March 17,1978 Agreement both as secretary of Blake and as secretary of Taiga. He had a number of concerns respecting the earlier drafts of the agreement, more particularly because a numbered company was involved as purchaser and that section 125 of the British Columbia Company Act might be offended with regards to a company's assistance to its shareholders. He objected to some of the clauses in the earlier drafts, but accepted the final one. In a memo he prepared the next day for one of his legal partners, he opined that the payment under 9.2(d) "has been somewhat contentious”. He considered that clause "to be vain tax-planning reasons by Hamill". In his view, the management fee was unearned. He added: “ Jones appreciates that in this form it will be taxable income to Blake and that does not concern him".

Patrick E. Hamill, a former Noranda general manager, decided to form his own wholesale lumber company. In late 1972 he met with Mr. Jones and- worked out an agreement with Blake to finance Taiga. In 1973 he had started Taiga directly out of Blake's offices which provided the secretariat. Both companies employed the same solicitor and the same accountant. Eventually, Taiga did extremely well.

According to Mr. Hamill, Blake did indeed provide substantial management services. Not only did it provide a working place, it also offered its staff and secretarial services. Mr. Jones was extremely helpful with reference to bank negotiations. Mr. Hamill consulted Mr. Jones often. The latter would accompany him to bank meetings, helped him to establish a line of credit. Mr. Hamill was not knowledgeable in bank matters. Mr. Jones accompanied him to Calgary as a helpful consultant.

Mr. Hamill produced as an exhibit a list of meetings with Blake between 1973 and 1978, mostly with Mr. Jones. He listed some 35 such meetings duly recorded during that period. At the request of the plaintiff, he produced the diaries from which these extracts were taken and stood firm upon an exhaustive cross-examination with respect to many of the entries. According to the witness, the practice of giving bonuses to high performers is common in the wholesale lumber industry.

It is crystal clear from Mr. Hamill's evidence, oral and written, that Mr. Jones provided considerable assistance to him over the years, which services were not limited to financial help. The Court was not provided with any technical definition of the words "special management services", but it is undeniable that Blake and Mr. Jones provided services to Mr. Hamill in his operation of Taiga, over and above the strict financing of the company.

There was no contract, written or oral, to the effect that Blake or Mr. Jones or both would provide such administrative services and clearly no legal obligation on the part of Taiga to pay for such services. Such past consideration may not have provided the basis for a legal contractual obligation on the part of Taiga or a legal contractual right on the part of Blake before the parties agreed to it. However, all parties concerned did agree that the sum of $250,000 would be paid on account of such services “ which the Company acknowledges have been performed by the Vendors for the Company and which has already been authorized”. The Court does not know if the services in question are worth $250,000, but that is the amount agreed to by the parties.

All the parties involved and their solicitors and accountants knew exactly what they were doing. Obviously, what they signed provided a tax advantage to Taiga, but that was a transparent consequence of the written agreement. The plaintiff now has to live with it. It may not repudiate its endorsement so as to obtain a more favourable assessment for the taxation year in question.

Consequently, the appeal is denied with costs.

Appeal dismissed.